Crowdfunding platforms raised more than £218 million worth of investment in 2017. As we come to the end of Q1 2018, crowdfunding as a revenue stream is more successful than ever. So, should you set one up and should investors consider crowdfunding start-ups?
As company formation agents, at Turner Little we’re always looking for the best ways for small businesses to get funding sorted. In this blog we’re looking at whether crowdfunding would work for you.
Great way of engaging consumers
There’s no doubt that crowdfunding platforms, including Seedrs, Crowdcube, Kickstarter and many more, have been phenomenally successful in creating a huge amount of interest in seed investing. By appealing to everybody through simple, direct explanations of products and services, engaging massive amounts of consumer interest has been possible.
Whether the eventual investment goal is reached or not, just by having a crowdfunding site and creating a showcase, lots of consumers have been made aware of your company.
The people who choose to invest tend to naturally become real-life ambassadors for your brand or product. They feel emotionally engaged with the success of the product and will be the first to spread the word. This works well when the product’s demographic overlaps significantly with the investor audience.
It’s super-efficient
Crowdfunding is an efficient and logical way to raise funding. But, don’t be carried away and forget that it still costs effort and money. Raising any kind of investment is not easy, and it always takes time.
This time will inevitably mean that start-up or small business owners are forced to take their eye off the operational aspect of their business while they secure funding. Any way to raise funds in a streamlined fashion should be utilised if possible.
Usually, the costs of fundraising are around 5-7%, whether this is through an angel broker, a fund or a crowdfunding platform. But with crowdfunding, you’re looking at a more efficient way in general. If you decide to go this route, look out for the following:
- To make your crowdfunding campaign successful, you need good content. This includes video and written and should be physical and digital.
- People attract people. It’s the same with a crowdfunding campaign and its rare to see one do well unless 30% of the funding is already secured before it goes live. This is known as ‘momentum money’, and is necessary to show the crowd that there is interest out there from other investors, therefore increasing their desire to invest.
Your company valuation must be accurate
The main criticisms of crowdfunding are the company valuations, which seem to be very much in favour of the entrepreneur. This could be a result of the government incentives in tax reliefs to mitigate risks of seed investing, meaning they’ve simply been absorbed into higher valuations. This may sound good for the entrepreneur, but be aware of the following:
- Investors are aware of this and there has been the hint of a backlash.
- A high valuation isn’t always the right thing, and if it’s overblown it leads to a lack of momentum. This will make it harder to raise funds and hang on to equity.
The platform does the admin
Crowdfunding platforms do all the heavy lifting in terms of administering to investors. However, so do fund managers. They both take care of the paperwork at the time of the initial investment and administer rights issues.
Whichever method you choose to reach investors, you’ll always need to report to them regularly. Some investors are keener than others and need more management. This is rarely to do with how much they invest, and it is simpler through a platform as you can communicate once to many investors, rather than individually.
Pros and cons
There are reasons to use crowdfunding platforms, and reasons to be cautious. Other forms of equity funding also have advantages. For example, a fund takes the least effort for you and is the most efficient, which means you won’t have to take your eye off business development. Sourcing angel investors using a broker is another way to reducing funding costs, but there will be legal bills.
How you attract investors is often the most important decision you’ll make when you start a business, so make sure you get advice and choose the best way for you. Turner Little can help you make the best decision for your business, contact us here.
About Turner Little
Founded in 1998 in Yorkshire, UK, Turner Little is a specialist UK and offshore company formation, banking and corporate services provider. Our services include company formation, UK and offshore banking, asset protection, credit correction/repair, trademarking and trusts. Other services include Internet services, mail forwarding, wills and probate. Turner Little’s vision is to offer the best possible service, together with market leading products.